- Glenn
Apple: Is it time to buy the world's largest company?
Opdateret: 19. apr.
We a looking into an uncertain economic environment, and it can be hard for investors to find companies to invest in. Hence, many investors look towards large corporations as they feel safer to invest in than smaller companies. There are no larger company than Apple, and that combined with being the largest position of Warren Buffett, it is naturally that many look in the direction of Apple. The question is if now is the time to invest?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this post, I do not own shares in Apple directly. I do own shares through Berkshire Hathaway though. I also have a position in Varta that delivers micro batteries to AirPods, while also having a position in Zepp that competes with Apple in the smartwatch industry. If you want to see or copy my portfolio, you can see how to do so here. I should also mention that I own Apple products and that I really like their products. Nonetheless, I will keep this analysis unbiased.
Apple is a multinational technology company that is headquartered in California. It was founded in 1976 and made their IPO in 1980 and is now the largest holding of all the three major indices, Dow Jones, S&P 500, and Nasdaq 100. I believe most people know about Apple, so I don't want to go in details about the company. However, I think it is important to know that the company operates in two different business segments: Products and Services. Products consists of iPhone, Mac, iPad, and Wearables, Home & Accessories. Services consists of AppleCare, Cloud Services, Digital Content, and Payment Services. In fiscal 2022 Products contributed with approximately 80 % of the net sales while Services contributed with 20 % of net sales. Apple has a very strong brand moat, as it is the most valuable brand in 2022 by several companies. I will also argue that Apple has a switching moat, as once a consumer has more than one Apple product, it becomes such a big part of the consumer's life that it isn't worth switching to a competitor.
Their CEO is Tim Cook. Before arriving at Apple, he worked in IBM and Compaq until 1998 where Steve Jobs asked Tim Cook to join Apple, where he started as Senior Vice President for worldwide operations. His educational background is a Bachelor of Science in industrial engineering and a Master of Business Administration. Since he has become the CEO, he has done a great job. Apple has doubled in revenue and profit and the company's market value has been driven up fivefold. Looking at employee satisfaction Apple consistently ranks highly on lists of "best tech companies to work for" and Tim Cook consistently scores over 91 % on employee approval ratings. Tim Cook has also received praise from Warren Buffett who called him a fantastic manager of Apple. I haven't been able to find much criticism about Tim Cook, however I have read that people are a bit disappointed of him not being more like Steve Jobs, and that he lacks a lot of enthusiasm and a little innovation. I don't think it is fair to compare Tim Cook with Steve Jobs though, as very few people are like Steve Jobs were. All in all, I feel very comfortable with Tim Cook leading Apple moving forward.
We have determined that Apple has a brand and switching moats. I really like the management as well. Now let us investigate the numbers to see if Apple lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. Apple delivers some of the best ROIC I have ever seen. Way above the required 10 % in all years in the last 10 years. I'm not sure that the numbers of 2021 and 2022 are sustainable in the long run but even if they decrease, numbers will probably still be fantastic. Not much to say, the numbers speak for themselves.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. These numbers are a bit curious as the equity has decreased ever since 2017. There is an explanation for that and that is that Apple has used cheap debt to fund buybacks. Apple has a strong balance sheet, but they had a chance of selling bonds at a low rate to boost shareholder returns. It is sensible, and because of that I'm not worried about the equity decreasing.

Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Free cash flow is pretty much consistently growing year over year and Apple delivered a record free cash flow in 2022. Levered free cash flow margin is also consistently high, while the decrease in free cash flow yield indicates that the company is expensive but we get back to that later in the analysis.

Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculation in Apple, I can see that Apple has 0.99 years earnings in debt. It is below the required 3 years, meaning that debt isn't something to worry about if you invest in Apple.
Apple is a great company, but no investments come without a risk and the same goes for Apple. One short-term risk is macroeconomics. Apple mentions that a strong dollar, higher freight prices and labor costs have all influenced the results fiscal 2022, and if these issues continue, it will hurt results moving forward. Furthermore, economic headwinds will affect consumer confidence. which means that consumers are less likely to buy Apple products that are usually sold at a premium price. The supply chain is a risk as well. In their annual report, Apple mentions that a significant concentration of their manufacturing is performed by a small number of outsourcing partners. We have seen how protests at Foxconn's manufacturing facilities has affected Apple that will suffer a shortfall in iPhone deliveries, meaning that Apple had do downgrade guidance. Protests or other events could happen at other manufacturing facilities in the future, hence having a concentrated manufacturing could hurt Apple again moving forward. Anti-trust regulations. A company with the size of Apple will always be a potential target anti-trust regulators. The U.S. Justice Department has investigated Apple since 2019 over allegations that it abused its market power to stifle smaller tech companies, including app developers and competing hardware makers. Rumors has it that Justice Department lawyers are in the early stages of drafting a potential antitrust complaint against Apple. Furthermore, Lina Kahn has been appointed Chairperson of the Federal Trade Commission, and she is known for being a stout opponent to big tech. Finally, we have seen a lot of regulations in China. And while these do not directly affect Apple, the President of Tencent has recently stated that he believes we will see internet regulations in other markets as well, it just started in China.
There are also a lot of potential for Apple moving forward. Growing the Services segment. Growing their Services segment could boost profitability moving forward as it is a higher margin business than their Products segment. In the fourth quarter of fiscal 2022, the gross profit margin of the Services segment was 70,5 % compared to a gross profit margin from their Products segment of 34,6 %. While Services hasn't grown much from fiscal 2021 (approximately 19 % of net sales) to fiscal 2022 (approximately 20 % of net sales), it could be something that could make Apple even more profitable moving forward. Apple wants to go cash neutral. We saw that Apple makes a lot of free cash flow every year. Apple wants to go cash neutral, meaning they are looking into boosting shareholder returns. It could be through acquisitions or by returning value to shareholders. In the latest earnings call CEO Tim Cook mentioned that they average an acquisition a month, while CFO Luca Maestri mentioned that they have made buybacks for more than $550 billion. As Apple wants to go cash neutral, we will see management delivering more value to shareholders through acquisitions, buybacks, and dividends. A strong moat. I already wrote about the strong moat of Apple earlier but when you have a company that is believed to have the most valuable brand in the world by different organizations such as Forbes, this brand is going to protect your investment from competition. Furthermore, brand loyalty among consumers continues to grow steadily for Apple. One example of the high brand loyalty among consumers is their net promotor score of 72, which is one of the highest in the technology industry. The strong brand moat combined with a switching moat means that I think that Apple is one of the highest moat companies in the world, and high moat companies are great investments.
All right, we have gone through the numbers, potential and risk regarding Apple, and now it is time for us to calculate a price for Apple. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 6,11 (which is the EPS from fiscal 2022). I chose an Estimated future EPS growth rate of 9 (Apple expects to grow diluted EPS by 9 %), Estimated future PE 18 (which is the double of the growth rate, as the highest historical PE has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $64,36, and we want to have a margin of safety on 50 %, so we will divide it by 2 meaning that we want to buy Apple at price of $32,18 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The Operating Cash Flow last year was 122.151. The Capital Expenditures was 10.708. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 7.495,6 in our further calculations. The Tax Provision was 19.300. We have 15.943,425 outstanding shares. Hence, the calculation will be like this: (122.151 - 7.495,6 + 19.300) / 15.943,425 x 10 = $84,01 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 6,97 and a growth rate of 9 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $81,48.
Apple is a great company with a great management. It is arguably the highest moat company in the world, which is probably why Warren Buffett has made it his highest position. There are some short-term macroeconomic risks when investing in Apple, but these won't last forever. Apple has stated that they want to diversify their manufacturing but until they have, it will still be a risk albeit a short-term one as well. However, Anti-trust regulations is something that could potentially affect Apple in the long-term depending on how they will turn out. Hence, it is something that needs to be monitored if you invest in Apple. Despite of the risks, I believe that Apple is a great company, and I will feel comfortable to invest in the company in the long-term. I doubt that Apple will ever sell at a 50 % discount to intrinsic value, so you will have to decide how much of a discount to intrinsic value you would like. Personally, I would like to have at least a 30 % discount to intrinsic value of the PAYBACK TIME price, meaning that I would like to open a position around $114.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.
I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.
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